SBI: Releasing the capital bottleneck

Fall in government holding will help the bank raise capital through a follow-on public offer or a rights issue.

In among the few major steps taken by the UPA government after coming to power this year is the Cabinet’s clearance to the SBI Act (Amendment) Bill. The Bill seeks to lower the minimum government holding in SBI from 55 per cent to 51 per cent.

The Bill, if cleared, will enable the government to bring down its holding in the bank from the current level of 59 per cent. The move will ease the growth bottleneck being faced by SBI and help it raise capital through a follow-on public offer or a rights issue, while allowing the government to mop up the much-needed funds. The former is more likely given that SBI will need capital in the next 12-18 months to sustain growth. At the current market price of Rs 2,325, a 10 per cent equity dilution will yield the bank about Rs 15,000 crore, which will give it the leeway to increase lending, say analysts.

Although SBI’s capital adequacy ratio (CAR) is a comfortable 14.11 per cent (in September 2009) with Tier-1 capital at 9.84 per cent as against the Reserve Bank of India (RBI) mandate of 6 per cent, the bank may have to beef up its loan loss provisioning coverage from 42.87 per cent to 70 per cent by September 2010, according to RBI’s directives. This may also pull down the CAR to a small extent.

SBI is clearly levered to macro environment and will want to make the most of any upswing in the credit cycle. Hence, the faster the Bill gets approved, the better it will be for the bank. The stock trades at a P/BV of 2 times based on its estimated 2010-11 book value.